Updated from 2:43 p.m. EST

Hit hard by economic worries and concern over the stumbling automotive sector, stocks on Wall Street closed with heavy losses Tuesday.

The

Dow Jones Industrial Average

, lost 176.58 points, or 2%, at 8693.96. The

S&P 500

fell 20.26 points, or 2.2%, to 898.95. The

Nasdaq

gave back 35.84 points, or 2.2%, to 1580.90.

An afternoon rally accompanied an announcement by the Federal Housing Finance Agency that it would work to refinance mortgages tied to government-sponsored entities

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

, but buying enthusiasm faded before the major averages could reach positive territory.

At a press conference in Washington, James Lockhart -- director of the FHFA, which controls Fannie Mae and Freddie Mac -- said the two companies will work to

refinance mortgages

in an effort to keep borrowers in their homes. The new plan will effect on Dec. 15. Lockhart also said that the borrower's obligation to pay mortgages would remain in place.

The Federal Housing Authority's Brian Montgomery said the housing crisis has no single solution, but hundreds of thousands of borrowers may be eligible to refinance under the FHFA's program.

Several large banks also announced refinancing plans.

Citigroup

(C) - Get Report

said it would alter terms for mortgages to avoid foreclosure proceedings on as much as $20 billion in at-risk home loans. Shares fell 3.7% to $10.80.

Bank of America

(BAC) - Get Report

and

JPMorgan Chase

(JPM) - Get Report

had previously announced similar initiatives.

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The decision by big banks to refinance mortgages is about a year overdue, said Michael Church, portfolio manager at Church Capital. Although it's much cheaper for banks when they avoid foreclosing on homes, securitization of mortgages has made it difficult to find out who the end-borrowers and the end-lenders are. "With things on a massive scale like this, I'm not surprised it has taken a year," he said.

Lawrence Fink, head of

BlackRock

(BLK) - Get Report

said in an investment conference that the financial markets were showing signs of capitulation, according to media reports. BlackRock management also reportedly said a $30 billion portfolio of mortgage-related assets that had belonged to

Bear Stearns

may be worth more than its market value suggests.

Meanwhile, credit card company

American Express

(AXP) - Get Report

got the go-ahead from the

Federal Reserve

to turn itself into a bank holding company. Such a move would allow American Express to build a deposit base and secure Fed funding. Shares slipped 6.6% to $22.40.

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

had earlier this year successfully petitioned the Fed for bank holding company status.

Separately, the

Los Angeles Times

reported that

Goldman Sachs

had been encouraging its clients to bet against California bonds even as it was collecting fees to help California sell the same bonds. Goldman shares ended the day up 4.9% to $74.68.

Traders were also checking the automotive sector's vital signs. On Monday,

President-elect Obama

met with President Bush and suggested that the government offer assistance to the ailing industry. Obama's petition followed a request by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to expand the $700 billion

Troubled Asset Relief Program

to include automakers.

General Motors

(GM) - Get Report

has lately shown signs that it needs assistance. Late Monday, the carmaker said it would lay off 1,900 factory workers. The announcement followed GM's report of a $2.5 billion quarterly loss on Friday and a Deutsche Bank analyst report targeting GM's stock value at $0. GM finished Tuesday down 13% at $2.92.

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"It's not going to be pretty, but they need to change their business," said Church. He said a major problem is that consumers aren't excited about buying domestic cars. "They should be on the phone with

Apple CEO Steve Jobs saying, 'give me your industrial designers.'" He said if the major automakers had a product people actually wanted to buy, legacy costs would still be a factor, but companies like GM wouldn't be talked about as potential bankruptcy candidates.

Timothy Speiss, leader of Eisner LLP's Personal Wealth Advisors Group, said the worst-case scenario for GM is a bankruptcy declaration and reorganization of the company's financial obligation. The best case, said Speiss, is direct aid from the government, with strings attached.

As it stands, said Speiss, the automakers are a subsidized employment vehicle, and states with automakers account for a large portion of the recent rise in unemployment. He said that more cars should be fueled by something other than gasoline, and U.S. automakers have costs associated with pension and other benefits that are far beyond those of their competitors.

There's a separate problem, said Speiss. "Lack of consumer confidence is keeping buyers of cars out of showrooms," he said, and tightening lending standards are making it harder to buy cars. "It's very dubious that without connecting relief for GM ... to a broader strategy, it would be irresponsible to cut them a check," he said.

In the energy patch,

Chesapeake Energy

(CHK) - Get Report

announced it would sell a large portion of its natural gas assets to

StatoilHydro

(STO)

. Chesapeake shares dropped 5.5% to $22.36, and StatoilHydro fell 6.8% to $18.05.

Meanwhile, cigarette maker

Altria

(MO) - Get Report

announced it would cut jobs in the face of an uncertain economic environment. The stock gave back 2.8% to $17.33.

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As for

earnings

, following Monday's close, coffee purveyor

Starbucks

(SBUX) - Get Report

reported a decline in profit and fell short of analysts' estimates. The company also said it would not provide earnings guidance for the upcoming year. Shares skidded 2.1% to $9.99.

Homebuilder

Toll Brothers

(TOL) - Get Report

announced that its building revenue suffered a 41% decline for the latest quarter. Shares ticked down 0.1% to $18.93.

Telecom firm

Vodafone

(VOD) - Get Report

, meanwhile, announced falling profit for the first half of its fiscal year and reduced revenue guidance. The company also announced it would reduce costs by $1.56 billion and reiterated its profit forecast for the year. The stock added 6.6% to $17.86.

Analyst actions

were setting a few names in motion. Credit Suisse cut its price target on

American International Group

(AIG) - Get Report

to $1.50 from $3. Goldman cut its price target for

Google

(GOOG) - Get Report

to $475 from $520.

AIG shares tumbled 0.9% to $2.26, while Google shed 2.3% to $311.46.

Shifting to commodities, crude oil lost $3.08 to settle at $59.33 a barrel. Gold dropped $13.70 to close at $732.80 an ounce.

The U.S. bond market is closed Tuesday for Veterans Day. The dollar was rising vs. the euro and pound but softening against the yen.

Credit markets were continuing to thaw. Three-month dollar Libor, a measure of the rate banks charge one another for large loans, was down 6 basis points at 2.18%. Overnight Libor was set at 0.35%.

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Abroad, European exchanges, including the FTSE in London and the DAX in Frankfurt, mostly edged downward. In Asia, Japan's Nikkei and Hong Kong's Hang Seng both closed with losses.